Bioventus Inc. (NASDAQ:BVS) Q3 2023 Earnings Conference Call November 7, 2023 8:30 AM ET Company Participants Dave Crawford - Vice President, Investor Relations Tony Bihl - Chief Executive Officer Mark Singleton - Senior Vice President and Chief Financial Officer Conference Call Participants Chase Knickerbocker - Craig-Hallum Lilia-Celine Lozada - JPMorgan Bill Plovanic - Canaccord Operator Thank you for standing by. My name is Dustin, and I will be your conference operator today. This time, I would like to ...

Financial Performance - Third quarter revenue decreased by 6% to $121 million compared to the prior year quarter[28] - Adjusted EBITDA was $22 million, even compared to the prior year quarter[28] - Year-to-date adjusted EBITDA increased more than $15 million, representing a 30% increase[22] - Adjusted operating expenses decreased almost $9 million due to restructuring benefits, spending discipline, and the Wound Business divestiture[46] - The company now expects 2023 net sales to be in the range of $498 million to $505 million[69] - The company now expects 2023 adjusted diluted loss per share to be a loss of $0.12 to a loss of $0.09[69] Segment Performance - International net sales grew 18%, and constant currency growth was 16%[40] - Surgical Solutions revenue decreased, with Restorative Therapies falling 28%[32] - Pain Treatments increased 3% compared to prior year, with double-digit volume growth driven by Durolane[60,45] Non-GAAP Measures - Non-GAAP Gross Margin was 74.8%[75] - Non-GAAP Operating Income was $20.396 million[75] - Non-GAAP Earnings per share was $0.05[75]

PART I. FINANCIAL INFORMATION [Item 1. Financial Statements (Unaudited)](index=5&type=section&id=Item%201.%20Financial%20Statements%20%28Unaudited%29) This section presents the unaudited consolidated condensed financial statements for Bioventus Inc. for the three and nine months ended September 30, 2023, and October 1, 2022 [Consolidated Condensed Statements of Operations and Comprehensive Loss](index=5&type=section&id=Consolidated%20Condensed%20Statements%20of%20Operations%20and%20Comprehensive%20Loss) The company reported a net loss from continuing operations of $8.8 million for Q3 2023, a significant improvement from the $101.0 million loss in the same period of 2022 Q3 & Nine Months 2023 vs 2022 Operating Results (in thousands) | Metric | Q3 2023 | Q3 2022 | 9M 2023 | 9M 2022 | | :--- | :--- | :--- | :--- | :--- | | **Net Sales** | $120,794 | $128,662 | $376,922 | $386,283 | | **Gross Profit** | $78,850 | $84,535 | $241,892 | $256,891 | | **Operating Income (Loss)** | $2,418 | $(126,839) | $(82,890) | $(151,597) | | **Net Loss from Continuing Operations** | $(8,791) | $(101,035) | $(113,540) | $(123,174) | | **Net Loss Attributable to Bioventus Inc.** | $(7,303) | $(108,245) | $(150,134) | $(126,774) | | **Loss Per Share (Basic & Diluted)** | $(0.12) | $(1.76) | $(2.40) | $(2.07) | [Consolidated Condensed Balance Sheets](index=6&type=section&id=Consolidated%20Condensed%20Balance%20Sheets) Total assets decreased to $811.1 million as of September 30, 2023, from $1.37 billion at year-end 2022, primarily due to divestitures Balance Sheet Summary (in thousands) | Account | Sep 30, 2023 | Dec 31, 2022 | | :--- | :--- | :--- | | **Total Current Assets** | $249,452 | $272,575 | | **Total Assets** | $811,104 | $1,372,649 | | **Total Current Liabilities** | $160,843 | $304,017 | | **Total Liabilities** | $584,648 | $960,427 | | **Total Stockholders' Equity** | $226,456 | $412,222 | [Consolidated Condensed Statements of Cash Flows](index=9&type=section&id=Consolidated%20Condensed%20Statements%20of%20Cash%20Flows) Net cash from operating activities significantly improved to $5.0 million for the nine months ended September 30, 2023, from a net cash use of $18.8 million in the prior-year period Nine Months Ended Cash Flow Summary (in thousands) | Cash Flow Activity | Sep 30, 2023 | Oct 1, 2022 | | :--- | :--- | :--- | | **Net cash from operating activities** | $4,970 | $(18,781) | | **Net cash from investing activities** | $16,398 | $(113,033) | | **Net cash from financing activities** | $(26,639) | $67,514 | | **Net change in cash, cash equivalents and restricted cash** | $(5,010) | $(64,831) | | **Cash at end of period** | $26,827 | $34,382 | [Notes to the Unaudited Consolidated Condensed Financial Statements](index=10&type=section&id=Notes%20to%20the%20Unaudited%20Consolidated%20Condensed%20Financial%20Statements) The notes detail significant accounting policies and events, including a "Going Concern" warning and details on recent divestitures and acquisitions - The company has substantial doubt about its ability to continue as a going concern due to the risk of violating financial covenants under its Credit and Guaranty Agreement in 2024[59](index=59&type=chunk)[60](index=60&type=chunk)[292](index=292&type=chunk) - On May 22, 2023, the company sold its Wound Business (TheraSkin and TheraGenesis products) for potential consideration of **$84.9 million**, including **$34.9 million** at closing and up to **$45.0 million** in earn-outs[69](index=69&type=chunk)[187](index=187&type=chunk) - On February 27, 2023, the company deconsolidated its subsidiary CartiHeal, transferring shares to a trustee and relieving **$60.6 million** in deferred consideration and milestone obligations[72](index=72&type=chunk)[190](index=190&type=chunk) - The company identified and is correcting immaterial misstatements from prior periods related to the calculation of noncontrolling interest and deferred income taxes[33](index=33&type=chunk)[34](index=34&type=chunk) [Management's Discussion and Analysis of Financial Condition and Results of Operations (MD&A)](index=33&type=section&id=Item%202.%20Management%27s%20Discussion%20and%20Analysis%20of%20Financial%20Condition%20and%20Results%20of%20Operations%20%28MD%26A%29) This section provides management's perspective on the company's financial performance, condition, and liquidity, highlighting key transactions and the "Going Concern" issue [Results of Operations](index=36&type=section&id=Results%20of%20Operations) Net sales decreased 6.1% to $120.8 million in Q3 2023, driven by the Wound Business divestiture and lower pricing in Pain Treatments, partially offset by growth in Surgical Solutions and International sales Net Sales by Segment and Vertical - Q3 2023 vs Q3 2022 (in thousands) | Segment / Vertical | Q3 2023 | Q3 2022 | Change $ | Change % | | :--- | :--- | :--- | :--- | :--- | | **U.S. Total** | **$106,227** | **$116,288** | **$(10,061)** | **(8.7%)** | | Pain Treatments | $48,416 | $47,010 | $1,406 | 3.0% | | Restorative Therapies | $24,855 | $38,096 | $(13,241) | (34.8%) | | Surgical Solutions | $32,956 | $31,182 | $1,774 | 5.7% | | **International Total** | **$14,567** | **$12,374** | **$2,193** | **17.7%** | | **Total Net Sales** | **$120,794** | **$128,662** | **$(7,868)** | **(6.1%)** | Adjusted EBITDA Reconciliation Summary (in thousands) | Line Item | Q3 2023 | Q3 2022 | 9M 2023 | 9M 2022 | | :--- | :--- | :--- | :--- | :--- | | **Net loss from continuing operations** | $(8,791) | $(101,035) | $(113,540) | $(123,174) | | **Adjustments (Depreciation, Interest, Taxes, etc.)** | $30,526 | $122,958 | $180,384 | $174,598 | | **Adjusted EBITDA** | **$21,735** | **$21,923** | **$66,844** | **$51,424** | - The decrease in U.S. Restorative Therapies sales was primarily due to the divestiture of the Wound Business and volume decline in the Advanced Rehabilitation business[223](index=223&type=chunk) - SG&A expenses decreased by **$9.1 million (11.6%)** in Q3 2023 due to lower equity-based compensation, reduced bad debt, and cost-saving initiatives[251](index=251&type=chunk) [Liquidity and Capital Resources](index=45&type=section&id=Liquidity%20and%20Capital%20Resources) The company's liquidity is under pressure, leading to a "Going Concern" disclosure due to the risk of violating financial covenants in 2024 - The company's financial position and forecasts raise substantial doubt about its ability to continue as a going concern, primarily due to the risk of breaching debt covenants in 2024[292](index=292&type=chunk)[59](index=59&type=chunk) - Cash, cash equivalents and restricted cash decreased to **$26.8 million** as of September 30, 2023, from **$30.2 million** at December 31, 2022[1](index=1&type=chunk) - The company amended its credit agreement on March 31, 2023, to modify financial covenants, waive prior noncompliance, and modify interest rates, requiring liquidity of at least **$10.0 million**[96](index=96&type=chunk)[274](index=274&type=chunk) - For the nine months of 2023, net cash from continuing operations was **$7.1 million**, a **$25.1 million** improvement from the prior year, driven by lower compensation and cost reductions[276](index=276&type=chunk)[324](index=324&type=chunk) [Controls and Procedures](index=48&type=section&id=Item%204.%20Controls%20and%20Procedures) Management concluded that due to ongoing material weaknesses, the company's disclosure controls and procedures were not effective as of September 30, 2023 - The CEO and CFO concluded that disclosure controls and procedures were not effective as of September 30, 2023, due to ongoing material weaknesses[302](index=302&type=chunk) - A material weakness exists in the control environment due to an ineffective risk assessment process, inadequate personnel resources, and high employee turnover[279](index=279&type=chunk) - A separate material weakness was identified related to the Q3 2022 rebates accrual, where processes were insufficient, leading to a subsequent **$8.4 million** revenue reduction[281](index=281&type=chunk) - Remediation efforts include reinforcing control execution and accountability, hiring additional resources, prioritizing key projects, and implementing new processes and controls for the rebates accrual, though not yet fully remediated[305](index=305&type=chunk)[331](index=331&type=chunk) PART II. OTHER INFORMATION [Legal Proceedings](index=50&type=section&id=Item%201.%20Legal%20Proceedings) The company is involved in several legal proceedings, including a putative class action lawsuit and a related derivative shareholder lawsuit - A class action lawsuit (Ciarciello v. Bioventus) was filed in January 2023, alleging failure to disclose information on rebate practices and financial prospects, with Exchange Act claims proceeding to discovery[176](index=176&type=chunk)[308](index=308&type=chunk) - A related derivative shareholder lawsuit (Grogan v. Reali) was filed in October 2023, alleging similar misconduct, with the company seeking to stay this case[176](index=176&type=chunk)[308](index=308&type=chunk) - Litigation related to the Bioness acquisition has been largely resolved, with Bioventus being dismissed from one case in April 2023 and another matter settled in December 2022[201](index=201&type=chunk)[335](index=335&type=chunk) [Risk Factors](index=52&type=section&id=Item%201A.%20Risk%20Factors) This section updates the company's risk factors, highlighting the potential adverse impact of the ongoing conflict in Israel on its business operations - A new risk factor highlights the ongoing conflict in Israel, which could adversely impact the company's manufacturing facility in Hod Hasharon, producing rehabilitation products accounting for less than **10%** of total net sales[313](index=313&type=chunk) - Potential impacts from the conflict include manufacturing disruptions, export delays, inability of regulatory bodies to visit the facility, and employee shortages due to military call-ups[313](index=313&type=chunk) - The company reiterates that its international operations subject it to various economic, political, and regulatory risks, including currency fluctuations, trade barriers, and geopolitical actions[313](index=313&type=chunk)[340](index=340&type=chunk)

Financial Data and Key Metrics Changes - Revenue for Q2 2023 was $137 million, a decline of 2% compared to the same period last year. Adjusting for the divestiture of the wound business, revenue growth was even with the prior year [23][28] - Adjusted EBITDA increased to $28 million from $22 million in the prior year, representing a growth of nearly 27% [7][58] - Adjusted earnings per share were $0.14 for the quarter compared to $0.10 in the prior year [58] Business Line Data and Key Metrics Changes - Pain treatments sales declined by 4% year-over-year, primarily due to pricing pressure, but there was double-digit volume growth for DUROLANE and SUPARTZ [29] - Surgical Solutions revenue growth slowed due to increased distributor churn, but growth is expected to accelerate in the second half of the year [11] - Restorative Therapies revenue fell by 8%, largely due to the wound business divestiture, with organic revenue declining by 2% [30] Market Data and Key Metrics Changes - The International segment grew by 16%, with constant currency growth at 17%, driven by strength in the Surgical Solutions business and EXOGEN [26] - The overall market for HA products is expected to see a reduction in revenue of high single to low double digits due to lower selling prices, but growth is anticipated to return in Q4 2023 [24] Company Strategy and Development Direction - The company is focusing on sustainable profitable growth and is selective in investment areas due to current leverage [8] - There is an emphasis on improving operating efficiencies to bolster cash flow and enhance internal controls [9] - The company plans to maintain cost control while selectively investing in areas that promise sustainable growth [8] Management's Comments on Operating Environment and Future Outlook - Management expressed confidence in the ability to deliver on revenue and earnings commitments for the year, while also improving processes and controls [87] - The leadership team is focused on addressing last year's challenges and is optimistic about the company's future performance [19][53] - Management anticipates price stabilization in the HA portfolio starting in Q4 2023, which should support revenue growth [24][49] Other Important Information - The company ended the quarter with $29 million in cash and $386 million in debt, having reduced overall bank borrowings by $60 million [32] - Adjusted gross margin was 74%, down 280 basis points compared to the prior year, primarily due to increased private payer revenue and an unfavorable product mix [57] Q&A Session Summary Question: What are the growth expectations for the pain business in the future? - Management indicated that they are growing volume faster than the market, with double-digit growth, while the market itself is growing at 3% to 5% [63][64] Question: Are there plans for further divestitures? - Management stated that they are focused on reducing debt and simplifying the business, with ongoing discussions about potential divestitures that make strategic sense [41][66] Question: How is employee morale and turnover post-restructuring? - Management reported improved morale and a strong team dynamic, with turnover levels consistent with industry norms [98][101]

Forward-Looking Statements This press release contains forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended. All statements contained in this press release that do not relate to matters of historical fact should be considered forward-looking statements, including, without limitation, statements concerning our future financial results and liquidity; our ability to continue as a going concern; ...

Dave Crawford - VP, IR Tony Bihl - CEO Mark Singleton - SVP and CFO Operator I would now like to turn the conference over to Dave Crawford, Vice President, Investor Relations. Please go ahead. Before we begin, I would like to remind everyone that our remarks today may contain forward-looking statements that are based on the current expectations of management and involve inherent risks and uncertainties that could cause actual results to differ materially from those indicated, including the risks and uncerta ...

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